Rendell sees warning for Pa. budget in bond rating

August 27, 2009

HARRISBURG, Pa. (AP) — Gov. Ed Rendell said Wednesday that recent evaluations of Pennsylvania’s financial picture by bond rating agencies support his effort to increase taxes to prevent a repeat of the current state budget impasse in coming years.

Rendell said a downgrade in the Moody’s Investors Service “outlook” for Pennsylvania illustrates how balancing the budget exclusively with one-time cash sources like the “rainy day” contingency fund and a medical malpractice fund surplus will only exacerbate the state’s future financial problems.

State budget talks have been mired for months in a dispute over whether or how much to raise taxes, and Rendell has had to abandon his push to increase the state income tax by 16 percent for the next three years.

The Democratic governor said he has not been able to persuade lawmakers to increase taxes because of what he described as “a significant aversion to raising revenues” among elected officials.

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“This has swept America,” Rendell said at a Capitol news conference. “It’s not just Pennsylvania, and it’s one of the, I think, most dangerous trends facing us.”

The ratings services produced reports as part of a public offering of $690 million in debt on Tuesday that resulted in refinancing at a rate of about 3 percent, which Mary Soderberg, Rendell’s budget secretary, considered a success.

Moody’s said that Pennsylvania’s outlook is “negative” and will get worse if elected officials don’t adopt a fiscal plan that accounts for the disappearance of federal stimulus money in two years. A Standard & Poor’s report said the state’s rating could worsen if its use of nonrecurring revenues prevented it from returning to “structural budget balance.”

The state’s bond ratings by the two firms, and by a third analyst, Fitch Ratings, were unchanged.

Erik Arneson, a spokesman for the Senate Republican caucus, which has led the opposition to new taxes, said GOP leaders will be reviewing the latest ratings reports as part of the ongoing budget talks, but offered no comment on them.

Soderberg said failure to impose recurring revenues — in other words, higher taxes — would have a snowball effect in the coming years, producing estimated deficits of $1.7 billion in 2009-10, $4.1 billion in 2010-11, and $8.6 billion in 2011-12. Adding to the state’s financial challenges are billions of dollars in higher public-sector pension costs set to begin in 2012.

“If you limit the debate to no recurring revenues, and you’re just dealing with the one-timers, yeah, maybe we can make this year work,” Soderberg said. “But it doesn’t work for next year and it doesn’t work for the following year, and that’s the point that the ratings agencies have started to take a look at.”

Such estimates involve assumptions about the overall size of the state budget, the state’s economic picture and other variables, but she said even worse numbers would result if the downturn recovers more slowly or if prison and health care costs grow faster than expected.

Rendell also said Wednesday he would support an expansion of the state’s sales tax so that it applies to everything except food and clothing, but such a dramatic change is certain to generate vehement opposition in the Legislature.